Class XXXX, Section XXXX, 2012IntroductionThe foreign exchange market also referred to as the currency market is a global financial market of converting and trading in the currencies. This market provides a platform where individuals or firms can buy, sell or exchange currencies (Dun & Bradstreet 2007). As a result of the increasing trends of globalisation and liberalisation of markets, foreign exchange has become a very lucrative business. However, firms engaged in foreign exchange transactions are susceptible to many risks due to unexpected changes in exchange rates. Additionally, foreign exchange firms face the risk of political climate, economic environment and financial conditions.
Therefore, it is crucial for firms as well as individuals to evaluate the possible risks in the foreign exchange markets and subsequently make suitable decisions that will expose them to limited risks. Risk analysis is the procedure followed to define and analyze the possible dangers posed to businesses, individuals and government bodies & agencies by events caused naturally or artificially by humans (Levi, 2005; Moffet, Stonehill & Eiteman, 2009). The key aim of this paper is to examine the objectives of risk analysis and the main techniques used in risk analysis.
Foremost, this paper will examine what risk analysis entail. Secondly, it will examine the objectives of risk analysis. Lastly, this paper will examine the techniques used in risk analysis. Risk Analysis As earlier stated, the foreign exchange market is characterised by numerous risks. Most of the risks in this market stem from unexpected changes in exchange rates between one country’s currencies to another. Moreover, the foreign exchange market is characterised by numerous complexities brought about by a country’s political climate, economic environment and financial conditions and regulations.
The various complexities and the risks that this market is susceptible to, can bring about adverse financial consequences. It is the therefore crucial for firms or individuals to effectively assess possible risks before making any decisions (Levi, 2005; Moffet, Stonehill & Eiteman, 2009). Basically, there are two aspects of risk analysis namely; the quantitative and qualitative aspects. Qualitative risk analysis defines non – numerical possible threats, determines the extent of vulnerable circumstances and seeks for possible solutions to curb or prevent the occurrences from happening.
Quantitative risk analysis on the other hand, determines numerical possibilities of adverse events occurrence. It measures the extent of loss that would be incurred if an adverse event happens (Bartlett, 2004). Objectives of risk analysisRisk analysis is conducted by many organizations for various reasons. Some of organizations conduct risk analysis because it is mandatory and a regulation that is stated in the law. Often such mandatory regulations are aimed at providing information security both for the organizations and clients especially in business transactions and IT infrastructure. A properly stipulated security process in an organization ensures protection of significant information, threat detection and provides considerable response to any occurrence of risk to minimize risk exposure and benefit of both client and organization.
This ensures prevention, detection and response processes of security in risk assessment (Shani, 2003). Risk analysis is often conducted to enable effective budgeting and planning on the risk threats and vulnerabilities according to prioritization. Once the analysis has been conducted, one can have a broader scope of the possible risks that may exist and hence carry out a more accurate budget rather than estimates.
Secondly, the objective of risk analysis is to combine the effects of various risks into effective risk estimates and hence enabling one to make decisions as per the goals and objectives. This is triggered by the better understanding of the risk estimates after the risk analysis has been carried out. It is also useful in the case of assessment and recommendation an organization or any other involved party general goals and objectives (Yoe, 2011).